TAX CREDITS & TAX-EXEMPT BONDS: STATE-BY-STATE PREVIEW

CALIFORNIA

BY DONNA KIMURA

AFFORDABLE HOUSING FINANCE • DECEMBER 2007

SACRAMENTO— Housing for the homeless is expected to receive more low-income housing tax credits (LIHTCs) than it has in the past in California.

The California Tax Credit Allocation Committee (CTCAC) plans to make homeless assistance a priority within the nonprofit set-aside and to fully fund the set-aside outside of the current geographic apportionment process in 2008, said officials. This change would make about 10 percent of the state’s 9 percent tax credits available for homeless assistance, essentially doubling the amount of credits that go toward homeless assistance.

In the past, California has set aside 10 percent of its annual LIHTC authority for applications sponsored by qualified nonprofit organizations. Within that 10 percent set-aside, half of the credits were apportioned to homelessassistance projects, which were funded first. CTCAC is likely to propose eliminating the homeless-assistance apportionment and making the projects the pre-emptive priority within the entire nonprofit set-aside, said Joe DeAnda, spokesman for state Treasurer Bill Lockyer. Lockyer is chairman of CTCAC, and Bill Pavao is executive director.

Officials are also paying close attention to operating cost minimums for 2008. There is a strong feeling among developers and others that the current minimums are inadequate to ensure projects have the appropriate expenses and cash flows, so developers are likely to see updated and increased operating cost minimums.

CTCAC also expects to introduce new program basis limits. The staff has been working on moving away from using the Sec. 221(d)(3) basis limit system and toward using a new methodology based on CTCAC’s portfolio of projects. Some concerns have been raised that the proposed limits would accommodate more basis per project and could result in fewer projects receiving LIHTC reservations.

As a result, CTCAC has been working on a plan that would still allow the program to fund roughly the same number of projects per year. As of late October, officials had posted two iterations of an alternate system on the CTCAC Web site for public review.

There is much at stake considering California has about $73.6 million in tax credit authority in 2008, the most of any state. It will also have about $78 million in state housing tax credits.

The state’s qualified allocation plan is not expected to be final until early 2008. CTCAC expects to continue to have two allocation rounds. The first would be in March 2008, followed by a second round in July 2008.

In California, the main point categories have included income targeting, leveraging, readiness to proceed, amenities based on location of the site, project service amenities, housing type, neighborhood revitalization, sustainablebuilding methods, general partner experience, and management company experience.

The point categories are not expected to change significantly, but there may be some adjustments to the “locational” amenities scoring to accommodate new growth areas.

2007 review
In 2007, CTCAC reserved $76.8 million in LIHTCs to 69 projects that will produce 5,374 tax credit units. That’s an increase in the number of tax credits funded. In 2006, 4,098 LIHTC units were financed.

"We were pleased by the quality of 9 percent projects awarded reservations," DeAnda said, noting that 29 applications in the second round received the maximum points possible. That means that the majority of the projects will meet all of the state’s policy objectives, he said.

The median award size was slightly more than $1 million, and the median project size was 61 units.

One of the most interesting trends to emerge was an overall increase in demand for the credits than in the last several years. Demand outpaced supply by 3 to 1.

All of the non-geographic set-asides were oversubscribed. The nonprofit setaside was the most oversubscribed, with eight credits requested for every one that was available, reported CTCAC.

More than $64 million in credits is set to go to new construction projects, while $12.8 million will be for acquisition- rehabilitation deals.

Tax-exempt bonds
In 2007, the total statewide private- activity tax-exempt bond volume cap was about $3.1 billion, with $1.7 billion going to multifamily housing, reported the California Debt Limit Allocation Committee (CDLAC). Lockyer also serves as chairman of this committee, and Joanie Jones Kelly is executive director.

Officials said the 2008 ceiling and program amounts would be announced in January.

CDLAC has reserved approximately 80 percent of the state bond ceiling for housing programs each year. This includes both multifamily and single-family housing programs.

Going into the new year, officials expect an increase in demand for taxexempt bonds because of the continued increases in construction costs and interest rates that have made taxexempt bond financing more attractive.

"As requests for allocations increase, it will become necessary for every project to fully maximize each point category," said CDLAC. “As a result, we may see more projects with deeper rent affordability and more service amenities."

The agency has had a 50-point minimum threshold for mixedincome projects and a 60-point minimum threshold for other multifamily housing projects. Developments are required to provide a 55-year minimum affordability term and restrict a minimum of 10 percent of the units to households earning no more than 50 percent of the area median income.

Meeting these requirements is necessary for a project to be considered, but does not guarantee an award. Only the highest scoring projects receive bond financing.

CDLAC is not anticipating any changes to the application evaluation criteria in 2008.

CDLAC reported that 132 multifamily developments received or were slated to receive bond financing in 2007 as of late October 2007.